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Oil In 2013: New Era For Global Markets As U.S. Marches Toward Energy Independence

After a decade of tight energy markets and rising commodity prices, the global economy is entering a new era marked by rising oil production at high prices. Yet, the prospects of U.S. energy independence, on the back of the “shale revolution,” a move toward cleaner energy, and slowing growth across the emerging world suggest longer-term oil prices should trend downwards. Going into 2013, crude oil will remain range-bound, with the potential to fall on sub-par global GDP growth and the prospects of positive supply shocks. Goldman Sachs sees Brent averaging $110 next year while Raymond James’ chief economist suggests U.S.-benchmark WTI could fall as low as the mid-$60s.

“We see an easing of oil prices [in 2013] as demand remains weak,” explained Peter Kiernan, lead energy analyst for the Economist Intelligence Unit, adding that even fast-growing emerging markets and non-OECD nations will experience a poor economic performance next year. “[Still], the generally secular trend of new finds becoming more expensive to extract” could keep a floor under prices, Kiernan said.

Indeed, Brent, the international benchmark, has remained resilient despite a U.S. economy that has barely muddled through, a sovereign debt crisis in Europe, and a marked slowdown in Chinese output, and therefore demand. With the exception of a short-lived mid-year plunge, Brent remained above $100 a barrel for most of the year, hitting a high of $128.40 in early-March.

Goldman Sachs’ economics research team expects Brent to average $110 next year even as supply constraints ease across the globe. With global GDP growth at 3.3% (well below the potential 4.2% estimated by Goldman), crude should trend lower through 2013, ending the year around $105 per barrel. Markets will remain tight, with curves “backwardated” (meaning short-term prices exceed long-term ones), but will progressively ease as capacity to bring more supply at current prices increases.

The supply issue will be key going forward. Brent’s resilience can be attributed to low spare-capacity among OPEC nations, in part due to Saudi Arabia’s increased pumping(which eats into spare-capacity), and a risk-premium attributed to possible Middle East conflict, particularly between Israel and Iran, Kiernan noted.

A “shale revolution” in the U.S. promises to change the market landscape. “U.S. production of shale gas has exploded with a nearly 50% annual increase between 2007 and 2011,” a report by the National Intelligence Council noted, while shale oil production, still in its infancy, could bring anywhere from 5 to 15 million barrels per day by 2020 at a break-even price as low as $44 to $68 per barrel. “By 2020, the U.S. could emerge as a major energy exporter,” the report added.

RBC Capital Markets’ commodities expert, George Gero, agrees. Gero sees WTI trading in a $20-band around the mid-$80s in 2013, adding that excess supply at Cushing, Oklahoma, where WTI is priced, are a result of a lack of transportation and refining infrastructure, along with weak demand. These supplies, coupled with a weaker dollar courtesy of Ben Bernanke and his quantitative easing, should help U.S. energy export growth.

Rising U.S. production, along with easing Asian demand, specifically from China, should ensure the substantial spread between Brent and WTI will continue next year, both Gero and EIU’s Kiernan suggest. This spread will narrow in the medium-term, as the Keystone XL pipeline comes to fruition and infrastructure in the area develops further, allowing WTI to approach the global benchmark.

Crude oil, being a global commodity with production in many cases concentrated in volatile regions of the world, is always prone to major swings on geopolitical events, particularly violence in the Middle East. But, if crude is set to remain range-bound, investment opportunities still exist. Companies that assist production like Schlumberger and Halliburton should benefit from increased drilling, while remaining relatively protected from price fluctuations. Refiners, such as Phillips 66 and Valero, should gain as infrastructure in the U.S. develops. Finally, major integrated names like Chevron and Exxon Mobil will have to walk the tight rope between difficult upstream and favorable downstream environments.

The world is tip-toeing into a new era for energy. Slower global growth means demand will remain tempered, yet higher extraction costs, and the constant possibility of a violent flare-up in the Middle East, should keep a floor under prices. With the U.S. slowly but surely taking a lead role as an exporter, rather than a major importer, and China cooling, longer-term oil prices should begin to trend downward. In the mean-time, expect volatility and range-bound markets.

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———-” “[Still], the generally secular trend of new finds becoming more expensive to extract” could keep a floor under prices, Kiernan said.”———-

This is the definition of Peak Oil. What Peter Kiernan is trying to tell you here is that Peak Oil theory is being played out right now. The petroleum market will collapse(and probably much of everything else) because the “floor under prices” has gotten so high, no one can afford to buy oil any more. I can’t say exactly what point that will happen—-but I’m very sure that at some point it will happen. And everyday brings us closer I think.

——-”…………longer-term oil prices should begin to trend downward. In the mean-time, expect volatility and range-bound markets.”———-

So, when are we going to pull up to the pumps at the station and see them set at $ .99/gallon?

——–” And by that I don’t mean cheap, but our willingness to accept higher oil prices has increased (oil demand elasticity if you will), and therefore we can pump a lot more out than we used to.”———

Why do that at higher prices? We can power our vehicles just the same or better using biofuels as we can with oil.

You can’t even drive a vehicle on pure gasoline—-the octane is too low. It requires the addition of a class of chemical called oxygenates in order to be even used as fuel(which cleans out sludges and varnishes and increases octane rating). Ethanol is an oxygenate.

Flex Fuel vehicles have been in use in the US for the last 25 years. A Flex Fuel vehicle can run on gasoline, or any mixture of gasoline and ethanol up to E85. We have blender pumps that can pump any mixture you choose from 10% ethanol to 85% ethanol, mixed as you pump.

Flex Fuel vehicles come with all the same options, warranties and specifications as conventional gasoline only vehicles. There is nothing that can be done with a gasoline only vehicle that can not be done with a Flex Fuel vehicle. And they cost the same.

Ethanol is safe and non toxic, less explosive, renewable and sustainable. Ethanol is safe enough to drink—-millions of people do every single day. We already use E10 to reduce air pollution,

and Ford research found that E85 reduces air pollutants 70% when used in the same engine as E10.

We can make ethanol out of almost anything, almost anywhere. Even wood or agricultural cellulosic waste—-we’ve been able to do it for over 120 years.

And ethanol is only one option we have—-we have biodiesel, natural gas and electric as well.

I think it is insanity to continue the roller coaster ride and suffer the health and environmental damages, economic, political, social disruption and high cost of continueing to try to use petroleum that is running out and costing more and more to use everyday.

It is time to get off the petroleum roller coaster and do ourselves the best favor we can do with petroleum—–start today to phase out the use of petroleum, and replace it with biofuels.

Fred I actually think you are quite far from the truth. The truth is that the floor underneath petroleum prices is slated to fall further in the coming years (before 2020) because the technology is getting better for shale oil extraction. New American supply will allow for an increasing amount of Mid-East supplies to be rerouted to slowing growth markets in the East.

I think referring to current pricing as a reflection of peak oil is inaccurate. Even now, major oil producers in the United states are watching the $45-70 production cost for shale oil fall dramatically, and this phenomenon will eventually be replicated elsewhere. It is better to think of this as a reflection of a new technology on the market, one which encounters reducing costs as it is scaled-up. It’s price will go down, then once its output declines, higher prices will spur new technology development and the cycle repeats. The real reasons for high prices right now are 1) We are in a transition period between diminishing convention reserves and increasing shale reserves AND 2) highly volatile political conditions and corresponding supply disruptions.

The amount of hydrocarbons that we can extract once new technologies are scaled-up is almost unfathomable, and greater than anything we will probably ever consume. If you want evidence, do some reading on oil shale (not to be confused with shale oil/tight oil). None of this is disagreeing with your point on the environmental degradation that comes with hydrocarbon consumption, but it’s best to not think of “peak-oil” or current oil prices as the logic for making a switch to biofuels etc…

I am, of coarse, speaking of the long term. Short term price ret retreats not withstanding—-I think we are in for nothing but increasing petroleum prices, and increasing supply disruptions overall from here on out.

I think it would be wise of us to begin to transition away from petroleum use for a lot of reasons—-not just price. And I think the best time for us to do that is right now—-while we have the time and the resources to make a smooth and painless transition.

It was in the 1930s that the American government joined with the Saudi Royal House to form ARAMCO, the Arabian American Oil Company, the largest oil company in the world, to ensue free flow of Arabian oil to America. As America began to depend more and more on Saudi oil, the American government had to extend so many unprecedented concessions to the Saudis. President Eisenhower consented to train Saudi soldiers in the time of King Ibn Sa’udi. In John F. Kennedy’s time, American jet planes were deployed to defend Saudi air space. Saudi Arabia equipped itself with missiles as a concession from President Lyndon Johnson. These militarist assistances increased American defense expenditure abroad but made sure uninterrupted oil flow from the Gulf. Through ARAMCO, the Saudi city of Al Khobar on the Gulf coast became practically under the control of America. It is the co-ordinating centre for all oil movements from Saudi Arabia to America. From there oil tankers move regularly to America, of course under American military security. When in 2011 the Arab Spring spread across the middle East, toppling the administrations in Tunisia, Egypt and Libya and nearly imbalanced Syria, many feared that someday it would pass through Saudi Arabia also and oil flow to the West would be shut off. Since the 1950s, SA had been witnessing people’s uprisings demanding democracy, civil and political freedom, corruption-free government and equal rights for women. It was expected that series of such uprisings would again happen, oil production facilities would be seized by people, oil industry would collapse, government would fire and Ian would interfere with money and arms for the rebels. The rain clouds have not yet gone past. Why the Americans in the 1950s established tie ups with the Saudi Regime was not only for oil which was not a major issue then but was for countering communist Russia’s increasing presence in the Middle East also. Possible geographical invasion from Russia was a fear of the Saudi Royal House also then. Another thing that tormented the Saudis and made possible this new American Saudi deal was the spread of atheism from communist Russia to counter which the Saudis with American help trained, armed and financed religious fanatics to fight atheism who now are turning against both these two countries, a true modern day paradox. Jimmy Carter had advised America to develop fast technologies for utilizing renewable energy sources. Alternate energy was his substitute to heavy energy cost and military spending. America depended much on Saudi Arabian oil and was spending a fortune for providing military security to oil vessels from the Gulf which would have become unnecessary had they depended equally much on alternate energy. Unfortunately, this peanut grower-turned president was not given a second chance in presidency lest he would do what he advised.